Challenges And Complexities In Sanctioning Russian Crude Oil Exports: Did The Sanctions Succeed? – Analysis

In December of the preceding year, the European Union implemented a prohibition on the importation of Russian crude oil, intending to exert economic pressure on the Russian military apparatus. However, as of a year later, this embargo was deemed unsuccessful in achieving its objectives.

Monitoring Russian oil transactions, the Kyiv School of Economics (KSE) posits an estimation that Moscow is poised to accrue $178 billion from oil sales in the current year, with a potential escalation to $200 billion in the subsequent year. Although these figures fall short of the pinnacle of $218 billion achieved by Russia in oil revenues during the initial year of the conflict, wherein Europe still accounted for approximately half of its oil exports, they underscore the expeditious recuperation of lost revenue by Russia.

Jan Stockbruegger, a researcher affiliated with the Ocean Infrastructure Research Group at the University of Copenhagen, elucidates that Russia, compelled to transport its oil across significantly greater distances, is presently reliant primarily on China and India, thereby diminishing market competition and marginally influencing prices downward. Nevertheless, the KSE observes that Russia’s benchmark Urals crude traded at $84 per barrel in October, a figure not considerably distant from the $90.78 average price commanded by Brent crude in the same month.

The primary importers of crude oil include mainland China, the United States, India, South Korea, and Japan. Notably, mainland China and India have exhibited substantial growth in their respective shares of global oil imports. In 2005, their shares stood at 5.6% and 4.6%, respectively, whereas in 2022, these figures escalated to 20.6% and 9.6%. Projections indicate a further increase to 22.3% and 10.0% for mainland China and India, respectively, by 2025.

Conversely, the United States has experienced a diminishing trend in its share of oil imports. Commencing from the onset of the Ukrainian conflict in the first quarter of 2022, there has been a discernible surge in Russian oil exports, particularly directed towards India and mainland China. These countries have capitalized on the imposition of oil import embargoes by numerous Western nations on Russia. Additionally, Azerbaijan has entered into oil transactions with Russia amid the conflict, while European countries such as Italy, Israel, Spain, India, the Czech Republic, Germany, Turkey, and Greece predominantly purchase oil from Azerbaijan.

Specifically, in May, Chinese and Indian imports of Russian crude oil reached unprecedented levels, setting records. Preliminary assessments from ship trackers suggest that the surge in Russian supplies, offered at discounted rates, has led to reduced demand for oil from the Middle East and Africa. Notably, China and India, ranking as the world’s top and third-largest crude importers, imported approximately 110 million barrels in May, marking a nearly 10% increase from the preceding month.

Despite U.S. warnings against evading price caps, these imports persisted. The data from Vortexa and Kpler indicates that India’s Russian oil imports reached a historic high of 8.6 million tonnes (62.8 million barrels), while China received 6 million tonnes, maintaining consistency with April figures. Indian refineries demonstrated an augmented acquisition of medium sour crude, including Urals, as well as lighter grades such as Sokol and Varandey. Chinese refiners, aiming to curtail feedstock expenses and enhance refining margins amid a slower-than-anticipated economic recovery, escalated their purchases of Russian oil, particularly by large private oil refiners.

Moreover, the broader Asian region experienced a peak in crude oil imports in July, reaching a record high of 27.92 million barrels per day (bpd). This surpasses the previous records set in May and June, with 27.35 million bpd and 27.53 million bpd, respectively. The impetus for this surge can be attributed to the continued substantial volumes of discounted Russian oil imported by the two major Asian buyers, China and India.

In foresight of this development, the European Union, in collaboration with the G7, implemented a groundbreaking measure last year, imposing a price ceiling of $60 per barrel on Russian oil transactions with external entities. This marked an ambitious and unparalleled attempt by the EU to extend its regulatory influence beyond its territorial boundaries, particularly given that a substantial proportion of Russian oil was then being transported via tankers owned and insured by Western entities.

Subsequently, Russian entities have acquired a significant portion of the aging segment of the tanker fleet from Western corporations, offering prices notably surpassing the value of scrap metal. This strategic move has resulted in the formation of a shadow fleet beyond Western oversight and control. A shadow tanker, as elucidated by Stockbruegger in discourse with Al Jazeera, is typically characterized by its absence of Western or G7 engagement in aspects such as ownership, insurance, financial backing, or other associated services. Essentially, it operates as a vessel impervious to sanctions. During the interlude spanning April to October, tankers insured by Western protection and indemnity experienced a notable decline, amounting to a two-thirds reduction in their conveyance of Russian crude. This decline was concomitant with a corresponding surge in trade facilitated by a shadow fleet, which, during the same temporal scope, witnessed a threefold increase, ultimately reaching a daily throughput of 2.6 million barrels.

The Kyiv School of Economics (KSE) posits that there exist a minimum of 187 clandestine tankers engaged in the transportation of Russian crude and refined petroleum products. The potential for Ukraine’s Western allies to significantly diminish Russia’s oil revenue remains substantial, with the KSE asserting that a more robust enforcement of the embargo and price cap could result in a 25% reduction, while lowering the price cap to $50 per barrel might achieve a reduction exceeding 50%.

Moscow, however, appears confident that such measures will not materialize. President Vladimir Putin endorsed a substantial 70% augmentation in defense and security expenditures for the forthcoming year, amounting to $157.5 billion, as part of an overall Russian budget of $412 billion, reflecting a 13% increase from the previous year, premised on elevated projections of oil-derived earnings.

Economist Maria Demertzis, a senior fellow at the Bruegel think tank in Brussels, elucidates the inherent challenges in enforcing a price cap, emphasizing the difficulty of monitoring and preventing countries, particularly those in the Gulf, from engaging in energy transactions with third parties. She contends that a lack of political will, evidenced by a significant portion of the global population aligning with or remaining neutral toward Russia at the onset of the Ukraine war, poses an additional impediment to effective sanctions enforcement.

There are indications, however, that the EU and the G7 are intensifying efforts to enforce the price cap. In October, the United States, through unilateral actions, purportedly reduced the price of Russian crude by $3 by imposing sanctions on two tankers utilizing U.S.-based services, marking the inaugural enforcement of the price cap. Subsequently, three more Liberian-flagged tankers faced U.S. sanctions for their recurrent transport of Sokol crude from Russia’s far east to Indian Oil Corp.

Recent reports suggest that the EU contemplated measures allowing Denmark to inspect and obstruct Russian oil tankers traversing the Danish straits—an imperative route for vessels departing Russian Baltic ports en route to the Atlantic. Nevertheless, Stockbruegger asserts a perceived token nature in such measures, emphasizing the global necessity for Russian oil. He contends that any attempt to exclude Russian oil from the market would precipitate a global surge in oil prices and inflation. Furthermore, he posits that the maintenance of sanctions is configured to ensure the continued availability of Russian oil in global markets. Data from the Institute of International Finance (IIF) reveals a substantial augmentation in Russian crude imports by China, India, and Turkey during the Ukraine conflict, raising the possibility of transshipment of crude or refined products to Western markets.

The utilization of intermediaries in evading sanctions is documented in various contexts. Robin Brooks, Chief Economist at the IIF, illustrates instances of German carmakers markedly escalating exports to Kyrgyzstan, Kazakhstan, and Armenia, positing that such activities are directed toward Moscow in the aftermath of the Ukraine war. Brooks contends that these practices necessitate cessation.

Therefore, the export of Russian crude oil has successfully navigated around sanctions through a clandestine system, undermining efforts to curtail Russia’s revenue from oil exports. Despite measures such as a $60-per-barrel price cap on Russian oil for third-party transactions imposed by the European Union and the G7, the Kyiv School of Economics (KSE) notes the existence of at least 187 shadow tankers involved in transporting Russian crude and refined petroleum products. The KSE suggests that more stringent enforcement of the embargo and a reduction in the price cap to $50 per barrel could substantially diminish Russia’s oil revenue. However, Moscow appears confident that such measures will not be effectively implemented.

Recent actions by the EU, G7, and the United States, such as sanctions on tankers and considerations of additional measures, indicate an increased focus on enforcing the price cap. Nonetheless, analysts like Stockbruegger emphasize the limited impact of these measures, citing the global reliance on Russian oil and geopolitical complexities hindering robust sanctions enforcement. Consequently, the adaptability of Russia’s oil export mechanisms remains a challenge to the efficacy of imposed sanctions.